IPO Preview: TPG Specialty Lending

Mar.21.14 | About: TPG Specialty (TSLX)

Summary

Specialty BDC finance company focused on lending to middle-market companies.

Funded to date by pension funds.

Expected dividend is less than that of competitor Apollo Investment.

Based in Fort Worth, TX, TPG Specialty Lending (NYSE:TSLX) scheduled a $116 million IPO on the NYSE with a market capitalization of $855 million at a price range midpoint of $16.50 for Friday, March 21, 2014.

The full IPO calendar is available at IPOpremium.

SEC Documents
Manager, Joint managers: J.P. Morgan, BofA Merrill Lynch, Goldman Sachs, Citigroup, Wells Fargo Securities, Barclays

Co-Managers: TPG Capital, Janney Montgomery Scott, JMP Securities

End of lockup (180 days): Wednesday, September 17, 2014

End of 25-day quiet period: Tuesday, April 15, 2014

Summary
TSLX is a specialty BDC finance company focused on lending to middle-market companies.

Valuation

Glossary

Compare

Mrkt

Price /

Price /

Price /

Price /

Dividend

Cap (MM)

Sls

Erngs

BkVlue

TanBV

yield

TPG Specialty Lending

$858

n/a

n/a

1.07

1.06

9.21%

Apollo Investment (NASDAQ:AINV)

$1,910

n/a

n/a

1.03

1.03

9.36%

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Conclusion
TSLX is a specialty BDC finance company funded to date by pension funds (see stockholders below).

The rating on TSLX is neutral.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

Business

TSLX is a specialty finance company focused on lending to middle-market companies.

Since TSLX began its investment activities in July 2011, TSLX has originated more than $2.6 billion aggregate principal amount of investments and retained $1.7 billion aggregate principal amount of these investments on its balance sheet prior to any subsequent exits and repayments.

Since TSLX began investing in 2011 through December 31, 2013, exited investments have resulted in an aggregate cash flow realized gross internal rate of return to TSLX of 17.6% (based on cash invested of $359 million and total proceeds from these exited investments of $405 million).

Eighty percent of these exited investments resulted in an aggregate cash flow realized gross internal rate of return to TSLX of 10% or greater

Middle-market companies

By "middle-market companies," TSLX means companies that have annual EBITDA, which TSLX believes is a useful proxy for cash flow, of $10 million to $250 million, although TSLX may invest in larger or smaller companies on occasion.

As of December 31, 2013, based on fair value, TSLX's borrowers had weighted average annual revenue of $202 million and weighted average annual EBITDA of $35 million.

TSLX invests in first-lien debt, second-lien debt, mezzanine debt and equity securities.

TSLX's first-lien debt may include stand-alone first-lien loans; "last out" first-lien loans, which are loans that have a secondary priority behind super-senior "first out" first-lien loans; "unitranche" loans, which are loans that combine features of first-lien, second-lien and mezzanine debt, generally in a first-lien position; and secured corporate bonds with similar features to these categories of first-lien loans.

TSLX's second-lien debt may include secured loans, and, to a lesser extent, secured corporate bonds, with a secondary priority behind first-lien debt.

As of December 31, 2013, TSLX's average investment based on fair value in each of its portfolio companies was $38 million.

Dividend Policy

TSLX's quarterly dividends, if any, will be determined by its Board. Any dividends to TSLX's stockholders will be declared out of assets legally available for distribution.

TSLX's Board intends to declare a dividend of $0.38 per share for the quarter ending March 31, 2014 to stockholders of record as of March 31, 2014.

Shares offered by the prospectus will be entitled to receive this dividend payment. The dividend is expected to be paid on April 30, 2014. TSLX anticipates that this dividend will be paid from income generated primarily by interest earned on TSLX's investment portfolio.

5% stockholders

State of New Jersey Common Pension Fund B 14.4%

MSSB TPG Specialty Lending Onshore Feeder Fund 14.4%

Universities Superannuation Scheme Ltd. 9.4%

TPG Funds 7.3%

Oregon Public Employees Retirement Fund 7.2%

State Teachers Retirement System of Ohio 7.2%

Silver Creek Group 5.1%

Arizona State Retirement System 5.3%

Use of proceeds

TSLX expects to net $106 million from its IPO. Proceeds are allocated as follows:

100% of the net proceeds of this offering and the concurrent private placement, together with its cash and cash equivalents, to pay down $156.1 million (or $172.5 million if the underwriters exercise their option to purchase additional shares of TSLX's common stock to cover over-allotments in full) of outstanding indebtedness under the Revolving Credit Facility (SunTrust), which matures in full on February 27, 2019, on or about the date of the closing of this offering.

After giving effect to the use of proceeds to pay down a portion of the outstanding balance under the Revolving Credit Facility (SunTrust), $276.4 million (or $260 million if the underwriters exercise their option to purchase additional shares of TSLX's common stock to cover over-allotments in full) will remain outstanding under the facility.

To the extent TSLX raises more or less proceeds from this offering and the concurrent private placement, TSLX will pay down more or less of the facility. TSLX does not intend to terminate the facility and may reborrow the amount TSLX repays, subject to certain conditions.

Disclaimer: This TSLX IPO report is based on a reading and analysis of TSLX's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.